The Rise Of Smart Sustainability: Size

Summary

• Our latest annual survey of global institutions' use of smart beta shows a rise in smart beta adoption among asset owners and an increase in combining smart beta strategies with sustainability parameters.
• We found a size bias in appetite for ESG and smart beta combined strategies.
• Regardless of implementation differences across regions, assets owners globally who anticipate applying ESG considerations to a smart beta strategy are doing so for investment reasons.

By Tony Campos, head of ESG, Americas, FTSE Russell

Our latest annual survey of global institutions' use of smart beta shows a rise in smart beta adoption among asset owners and an increase in combining smart beta strategies with sustainability parameters.

We've noticed rising interest in this blending of ESG and smart beta in recent years, an approach we call "Smart Sustainability". So, this year we produced a separate report to explore the motivations and regional differences in the application of ESG to smart beta.

Overall, of respondents using and/or evaluating smart beta strategies, only 42% have ruled out applying ESG considerations to their smart beta strategy of choice while nearly half (44%) are actively considering doing so. Governance, carbon, and social considerations were all commonly cited among respondents, suggesting a growing sophistication with the use of ESG risk management tools.

Source: FTSE Russell. Smart beta: 2019 global survey findings from asset owners

But the upward trend is not universal.

We found a size bias in appetite for ESG and smart beta combined strategies. 58 percent of larger organisations (but only 30% of smaller ones) are looking to increase their allocation over the coming years. And only a tiny minority (4%) of larger funds ruled out increasing allocations to ESG and smart beta. This seems logical: larger institutions tend to have the resources to investigate and often allocate to newer fund strategies before their smaller peers.

We also found a geographical imbalance in appetite for Smart Sustainability strategies; In Europe 77% of European asset owners expressed interest in applying ESG considerations to smart beta (up from 55% from 2018), while 17% of North American asset owners indicated similar interest (down from 25% on 2018).

Source: FTSE Russell. Smart beta: 2019 global survey findings from asset owners

We think Europe's lead in incorporating ESG into smart beta strategies may reflect the changing regulatory context with European regulators encouraging greater disclosure by both companies and investors. There have not to date been similar regulatory developments in the US, although Canada is moving ahead and has established an Expert Panel on Sustainable Finance to advise the government.

Regardless of implementation differences across regions, assets owners globally who anticipate applying ESG considerations to a smart beta strategy are doing so for investment reasons. More than three quarters are motivated by avoiding long term risk as compared to a little over half of respondents last year. But it's clear that adoption is happening at different speeds in different market sectors.

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